Financials Testing Taxpayers' Patience

Congress is working on plans to rein in the questionable activities of Wall Street, and re-direct the self-serving focus of major banks. I wish them good luck with that.

The financial firms are fighting back with propaganda blitzes aimed at raising public fear.

For instance, independent economists are debating the pros and cons of moves announced in the U.S. and the U.K. to remove some of the stimulus efforts that rescued the financial firms this time, for instance the U.S. Fed’s decision to stop its program of buying mortgage-backed securities, and the U.K.’s decision not to extend its program of allowing banks to exchange mortgage-backed securities for government bonds.

But the Institute of International Finance (IFF) has no doubt about what the outcome would be. It says it would have “a significant impact on the economy”, that mortgage rates will rise, and home sales and home prices will decline. The group also opposes the ‘Volcker Rule’ being considered by Congress, which would prevent banks that take in customer’s deposits from trading for their own profits in markets.

What is the IFF? It’s a global association of commercial and investment banks, insurance companies, and money management firms, which established itself in 1983, after the international debt crisis of the early 1980s.

Financial firms have already been successful in convincing the SEC not to re-impose the ‘uptick rule’ that impedes relentless short-selling in market declines. Wall Street successfully lobbied to have the rule rescinded in 2007, just in time for the 2007-2009 bear market. The long-standing rule had been imposed in the aftermath of investigations into the causes of the 1929 market crash.

The SEC voted two weeks ago against re-instating the uptick rule, and instead provided a rule that any time a stock has declined 10%, short-selling will be banned for the rest of the day and the following day. It is so ridiculous that even those at Wall Street firms laughed about it and called it ludicrous. So now a stock can still be driven down 10% in a matter of minutes, but it cannot be driven down another 10% until two days later.

Adding to the investor insult is the memory of how the financial firms howled bloody murder 18 months ago when their own stocks were subjected to heavy short-selling in the aftermath of the collapse of Lehman Brothers (OTC:LEHMQ). Regulators rushed to their rescue by banning all short-selling in some 799 financial firms for the duration. The result was instant in creating a ‘short squeeze’ on short-sellers, forcing them to move to the buy side to close out their positions, which in turn sent the shares of banks and other financial firms rocketing to the upside. (The short sale bans were quietly removed a few months later after they had done their job).

Yet the financial firms insist that short-selling is good, contributing to price efficiency and adding market liquidity, and need not be regulated. Well, apparently as long as it doesn’t include short-selling of their stocks.

Meanwhile, how are the banks doing in response to government pressure that they help the economy recover by making loans and modifying troubled mortgages, using some of the billions they received in stimulus money, and the huge profits they’re making from low interest rates and their high-risk trading in derivatives (probably the next bubble to burst)?

Well, the FDIC reported a few weeks ago that bank lending plunged last year to its lowest level since 1942, with the failure to lend showing up in all forms of loans, including home mortgages, commercial loans, and construction loans. The Federal Reserve reports that lending remains tight.

And how are the major banks doing with their promises to aggressively modify mortgages for qualifying home-owners, those who are behind on payments but able to handle payments if loans are modified to more reasonable rates or extended to longer terms?

The latest report from the Home Affordable Modification Program shows incredible foot-dragging and excuses. Of 3.4 million qualified mortgages only 3% have been modified. The lender with the best record is GMAC, which has modified 17% of the 65,751 qualifying mortgages on its books. One of the worst records has been by Bank of America (NYSE:BAC), by far the largest lender, with 1.1 million delinquent mortgages, of which it has only modified one percent.

As they did after a similar report six months ago, the banks have promised to do better.

In the other direction, however, many major financial firms are doing just fine.

The latest SEC filing by Goldman Sachs (NYSE:GS) reveals that in 2009 the firm made more than $100 million in trading profits in just one-day on 131 days, an average of every other trading day. It lost money on only 19 days, and on the losing days none of the losses exceeded $100 million. That broke the record it had set the previous year, 2008 (when the financial system was supposedly close to total collapse), when Goldman made more than $100 million in one day on a then record 90 days. With the stock market in a sickening bear market decline in 2008, could one assume there was considerable short-selling involved, easier with the uptick rule abolished?

As for redirecting the focus of financial firms, so far it’s been a case of thanks to taxpayers for bailing us out again, but don’t look for us to return the favor. Dig yourself out of the mess. And to the 16 million unemployed, we’re not hiring you. In fact we’re sending you some company, downsizing our loan operations and closing branches - unless you’re a hot shot trader who can make us $5 million a day trading derivatives in our expanding trading departments – we might offer you a $5 million signing bonus.